Venture Capitalists' Assessment of New Venture Survival_1_

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					 Venture Capitalists’ Assessment of New Venture Survival
Increased understanding of venture capitalists’ decision making in turn makes it possible for
entrepreneurs seeking capital to address their requests for funding to those criteria venture
capitalists find most critical to the survival of a new venture. Venture capitalists consider the
market, competition, and the ability of management to choose and establish a viable position.

Market Considerations
  • Superior performance arises from a fit between the capabilities of a venture and the key
     success factors of an industry.
  • A new venture team must commit to a number of key factors they believe will lead to
     success within the competitive environment.
  • If the competitive environment changes, so too may the key success factors rendering the
     venture at a competitive disadvantage. On the other hand, if key success factors within
     an industry remain stable, early commitment to a new technology and customers is likely
     to provide a sustainable competitive position and thereby a higher probability of survival.
  • The timing of entry also affects performance—pioneers have higher returns if they are
     successful, but have a higher risk of failure. A pioneer enters a new industry first and a
     late follower enters an industry late in the industry’s stage of development. Some
     entrepreneurs decide not to pioneer with unproven technology or an unproven market, but
     wait until more information is available about customers’ tastes and behavior so as to
     provide a product that better meets their needs. In doing so they learn from the pioneer’s

Competition Considerations
  • In newly established industries, pioneers need to create and develop entry barriers to
     avoid having their positions eroded by new competitors who can successfully imitate
  • Barriers to entry initially provide a pioneer a lead-time, and thereafter minimize
     competitive rivalry within the industry. Lead-time refers to the period of monopoly for
     the first entrant prior to competitors entering the industry and competitive rivalry refers to
     the level of competition among industry members during industry development.
  • A long lead-time is valuable because it provides time for a venture to learn new tasks, to
     invent and overcome conflict in new roles, to develop an informal structure, to create
     stable links with stakeholders, and to develop some organizational inertia and stability
     that will encourage customer trust. In other words, lead-time increases a venture’s
     chance of survival.

Management Capability Considerations
  • Education capability refers to the amount of resources and skills available to overcome
     market ignorance through education. If management is highly educated and, even more,
     able to educate their market, new ventures have a higher rate of survival.
    •   Ventures with high educational capability can more rapidly develop stable links with
        stakeholders, decrease customer uncertainty, and obtain customer trust.
    •   Venture capitals also assess management experience in related industries. Industry
        related competence refers to the level of experience and knowledge with the industry
        being entered, or a related industry.
    •   Success is more likely to be achieved by those entering an industry in which the
        management team has prior experience. Industry specific human capital is a significant
        determinant of venture survival.
    •   A management team often ranks as the most important criteria of a venture capitalist’s
        decision-making process.

Shepard, Dan. “Venture Capitalists’ Assessment of New Venture Survival.” Article 24: 143-152.

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Description: Venture capitalists are the entrepreneurs to invest in other entrepreneurs, investors and other risks, they through the investment profit. But the difference is venture capitalists all cast out of the capital owned by all of its own, and not entrusted the management of capital.